I found this forum a couple of days ago and I am impressed with the wealth of information available here.
I am doing some research for a good friend of mine (not acting as a broker) since the topic came up and he asked me to learn more about the MTN's. I think I have a good idea of the structure of these investments from origination (from reading the regulatory filings) to their distribution through the assigned dealer network. The following questions are still unanswered and I would appreciate if a knowledgeable member of the board can answer a few of them.

1) When it comes to pricing, sometimes I have seen offers in the low 70's and someone on this board replied that it was unrealistic. Question is, how can anyone tell if it is unrealistic without knowing the term of the note and the coupon? Let's say a zero coupon MTN for a 10 year term and a yield of around 4% should be in the high 60's low 70's range, shouldn't it?

2) How does the "flipping" of MTN work? Are the investors betting on the movement of interest rates in their favor? Let's say company A issues $200M in MTN out of their $1B MTN program at 6% today. In another 6 months they issue another $200M from the same program but at 5% because the market rates have dropped, wouldn't the issue purchased 6 months ago be worth more then the new issue because of the coupon and vice versa if the rates have gone up?

3) How liquid is the MTN market in general? is it easy to dispose of them ?

4) Some MTN issues prohibit the participation of U.S investors (both individual and institutions) and some only restrict the Individual unless they are qualified. What is the qualification criteria?

Thanks in advance to anyone who answers these.

1) Pricing depends on several factors.

Ratings, term, risks, etc willbe highlighted in the prospectus.

70s, will probably be a low quality note, perhaps even a junk bond.

An unregistered bond ( 144a ) may come at that price.

Flipping is not as easy as is persived.

2) Most good notes with a good discount comes with a monetorium.

You monitise them by securitsation.

3) Depends, if you are holding junk, then it is hard.

4) If a debt originates in any issuing country, is it not unwise the

drain it's own liquidity buying it's own debt?

If it does so, it would be asking for trouble.

Pricing in the high 60's to low 70's is possible but the question you should really ask is why?

Why would I sell you a dollar for 68 cents plus offer a penny to anyone who brokered that transaction?

Most MTN's in those price ranges are junk, risky, or both.

I actually saw a $5 B MTN sold about a year ago at 101+1. Someone was willing to pay because of the quality and history of the seller.

As for liquidity, it's not always easy. Otherwise, Joe Schmoe would try to create his own unregistered MTN, sell it, and have a pile of funds to play with. Boards like this would suddenly be full of MTN offers.

for the answers. Could you please elaborate on the pricing issue? My understanding is that the important factor in investors' decision to buy MTN over a corporate bond is the flexibility it offers and one can custom design a note to ones preference.
For example, company A registers an MTN program with flexible terms of issue. Let's say the company offers the issue for 10 years at 5% rate at par pricing of 100 with the option for the investor to buy it at zero coupon. If the investor chooses to structure the issue without a coupon then the price for the 10 year note should be 61 or 62.
Can you explain how one securitises their holdings?

Chad,
wouldn't you buy my dollar for 68 cents today with a promise that I will give you a full dollar in 2018 with no interest in the interim?

How can one buy discounted MTN and securitise them to sell them back in the market and how often it can be done in the real world?

pricing is always depend on market and risk, a 10 year MTN with 4% in the current market would be priced with an expectation of higher interest in the next years, and liquidity issues such as : is and will there be a market.

Lets say the issuer is AAA than the pricing for something like this will probably be in the 98 to 93%. The reason is that it is very liquid due to the rating and 4% right now is about just below market rate, so unloading will be easy. With rating going down to A you will see a complete different market, some issuers are seen as risky because they still play games on their balance sheet and that means the rating can slip into the BBB or even below investment grade in a long term view, that means a price in the 80%

For non investment grade, below BBB it all depends, it can go as low as 8% (Zimbabwe).

Your flipping example is right, sure the price would be different, but it depends if you talk exchange traded or private placement. A perpetual offering is made to allow these fluctuations and the new issue would be used to buy the older one if the older one was getting to expensive in the long term.

Flipping is easy when the market wants the product, but you can find yourself stuck when the market changes its mind. Lets say real estate US based MTN who were once AAA could be flipped easily and now they are not going at all even when there is no default and they are all on prime credit loans.

Liquidity is very high for good paper, the market currently does not like the bank based paper but thats just a good time to buy a "steal". It all depends on the issuer, the market outlook and the general perspective.

The qualification is easy, if someone does not want to deal with the US regulatory crap they prohibit access from US based investors, some even do not take US citizens living outside the US. Thats something I understand and support by the way, because even with a very high liquidity in the US financial markets their penchant for loosing common sense or never developing it combined with a lawsuit mentality is something especially smaller issuers do not like to handle and regulatory cost are very high (our lawyers now charge above 1000 USD per hour). The rest is depending on the jurisdiction. The definition of a "qualified" investor is different depending on the market, but generally MTN are not for beginners, so you want someone who has the financial patina and can handle them. Its based on regulations and customer protection and the issuer protects himself against frivolous lawsuits (so he thinks) but it is also marketing information for other offerings.

for the information. When you say a AAA rated MTN with 4% coupon may sell between 93-98 in the market, I am sure you speaking of a note with active coupon and yearly disbursements?
Now if an investor approached the issuer or a designated dealer of that MTN and asked them to structure that offering with zero coupon, wouldn't the price be much lower? in the 60's?
The thing that confused me was some posters responses to JB posts on the forum that MTN pricing in the 70's is unrealistic for an investment grade note. I thought it was impossible to tell if the pricing was real or not without knowing the term and the coupon of the note.
I thought you could do it if you specifically asked for a zero coupon or say a 1% coupon in exchange for an upfront discount. Obviously the price will be higher for a shorter term note and lower for notes longer than 10 years.

Sure you can use Zero coupon structures (http://en.wikipedia.org/wiki/Zero_coupon_bond) and the price will depend on the liquidity expectations and market interest rates and so you are probably in the right pricing when talking a zero coupon instrument.
You are right that for pricing you need to know the details, however when someone talks about MTN, it means there is always a coupon and when some gives a rating, lets say he offers MTN AAA rated in the 70% it is usually a fake, because the issuer would issue with a market rate of interest coupon either fixed or floating and so anything below 90% on an investment grade would be looked at with suspicion. Currently the markets are a bit different because the banks are looked at with different perspectives and so a BBB (http://en.wikipedia.org/wiki/Investment_grade) than the price can be lower than usual depending on the issuer, some even treat BBB paper as junk and a lot of people took them of the list of accepted paper (most do not look below A-).
Anyhow in a broker offering in the 70% the usual experience hints to a waste of time, thats why the reaction is the way it is.
If you can work with the issuer, sure you can tailor the MTN to your needs, however they will only do so when you have a certain volume and performance history and it fits their need

here is a sample for a fall from grace from investment grade to non:

quote
S&P downgrades Countrywide Financial to 'BB+/B'
By Sue Chang
Last update: 2:20 p.m. EDT May 2, 2008
PrintPrint Email Subscribe to RSSRSS DisableDisable Live Quotes
SAN FRANCISCO (MarketWatch) -- Standard & Poor's Ratings Services said Friday it lowered ratings on Countrywide Financial Corp. and Countrywide Home Loans Inc. to BB+/B from BBB+/A-2. The move was due to the disclosure from Bank of America Thursday that there is no assurance that any of Countrywide's debt will be "redeemed, assumed, or guaranteed" after their pending merger, according to the ratings agency. All of Countrywide's ratings are on CreditWatch Developing due to the uncertainty over the legal status of Countrywide's creditors after the union. Any rating below 'BBB' is deemed "not investment grade" by S&P.
unquote

without the rating problem look at what happened in the auction rate securities market: http://forum.reserve-bank.com/viewtopic.php?t=326

Thank you Richard for a detailed answer. I understand the structure better now. From my understanding so far the process goes something like this:

1)Company ABC approaches a bank to underwrite an MTN program
2) Bank underwrites the program and shelves the registration with the authorities for an underwriting fee
3) Bank then appoints dealers for marketing of the said issue in denominations that the company ABC wants (all at once or on as needed basis)
4) The buyer buys it from the designated dealers on terms that can be custom tailored to the buyer's needs (if mutually agreeable).

From that point on the holder of the notes can sit on them and wait for the interest rates in the market to turn in his favor to make money while taking the coupon disbursements or increased face value as the time goes by in case of a zero coupon note.

I understand till this stage. Now I hear that the buyer can securitize it to re-sell in the market. How does that process work?

I know that I am asking too many questions, but my curious nature will not rest until I find the exact flow of these instruments in the market. I am very thankful for the informative replies.

my dear friend, you have a long way to go, what you describe can be done, does not need to be done that way, some issuers never use a bank, they do it all themselves. You think Coca Cola  or similar needs a Bank to do its bidding. The whole process was structured to cirmvent the banks and have it all streamlined. The investment bankers as placement agents now a days get a razor sharp margin if we are talking a AAA issuer, if its difficult sure some use an underwriter for the credit enhancement or they pay a higher placement fee to the placement agent.

If an MTN is exchange traded it can be sold on easily, if it is a private placement the buyer either needs to hold it for some time or he needs to find a private buyer, depending on his jurisdiction and the jurisdiction of the issuer. The rules vary. When he has to keep the MTN for some time and wants to avoid this, so he takes the MTN's and uses them as collateral for his own notes and issues these notes. That can be done either in the form of a bank secured private placement of promissory notes. For example buyer XX has 10Y MTN with 12 month libor plus 2, so he issues himself a mtn program with matching terms secured by his notes. Since he has to hold them he will not like the regulatory regime to easily identify that he sells on, he asks the bank holding the MTN for him to secure the payment with a guarantee, so enhancing his SPV based notes to the rating of the bank.

Then he is placing the notes and his status is that he is the owner of the notes  and also at matching terms the borrower through other notes, which zeros it out. If he got the MTN at a decent rate he may even make some money in between depending on what he wants to do. He can also leave this private placement in the structured form alone and use a Depositary Receipt structure where the bank sells them on under their name but for his benefit; which can be tricky and bring him in a grey area. he can also use them for a loan or in a Repo Structure.

There are all kind of possibilities, he can create derivatives by splitting the principal from the coupons and novate the obligations and double flip them through a tax enhanced structure allowing a tax debit through an artifical loss and a tax free offshore win situation.

 

USC,

There is much for you to learn as many of the guys here has given you answers.

There are dealer banks that have loads of offers now and all

you really need to do is get an account with any of these folks.

They can even securitase the papers for you.

Firstly, you buy on the primary, an entire issue,

meanwhile you get credit approval, securitise it, and if the volume

is high, syndicate it.

I much prefer Repos with central banks through dealer banks.

That way, I s;leep better.

Keep to safer institutional deals and if you are looking for

higher yields, the risk factors escalates faster than you can imagine.

Richard, as usual has given really sound advise and it would be prudent

if you heed it well, especially if the funds are not your own.

will

Thanks a lot Richard for the explanation. Now I have a good idea of their structure.

Will,
My interest in the notes was merely out of curiosity since I have seen them offered for sale on the internet boards along with LC's and BG's. I knew a couple of things about the later two but wanted to know the MTN a bit better and Richard was kind enough to share the information.

I assume if in the buyer buys the notes and then issues his own notes under the exact terms using them as collateral then the profit comes from finding a good deal on the face value of the original notes?

Hi USC,

Not that easy.

Not just face value, coupons as well.

Upon purchase ( 541 ) and Payment ( 103 ) then you activate

a readied credit line as to be ready for the next transaction.

Meanwhile a new note is issued based on the note you have bought.

The new note is sold, and on a lesser discount and lower coupon.

This provides a residule income from the differential on the coupons.

all has to be lined up before the trade begins or it will collapse.

That is why old timers only go for nice papers.

Even if the margins are razor thin, it is still better than junk

papers with high discounts.

I had a recent case late last year, when Pepsi Co notes came out.

My broker in a dealer bank in NY called me, and with the time differential

my response to go ahead came 3 hours later.

The paper was gone and I was told in 15 minutes flat.

You have to have a fat account, with ready credit lines and really

strong relations with the banks, underwriters etc.

It is hard to fanthom why so many Joker Brokers claim that

it can be done.

I am sure Richard will agree and I am not trying to be negative,

for all I know you may be on forbes lists, but do bear in mind that

it is not as easy as it slides off the tongue of Joker Brokers.

will

Thank you Will for the explanation.

I buy a ten year note AA+ at say 85 with a 4% coupon

I use it as a collateral to issue another note at 89 and 3% coupon for the same term. How would the rating of my new notes work? Would it be based on my standing or the standing of the custodian bank that is holding my original notes as collateral?

What if my rating or the rating of the custodian is lower then AA+ ? Why would anyone buy my notes at my terms that are worse than the original terms of the collateral?

My email is clearverbiage@lycos.com